Mobile & Telecom

T-Mobile and AT&T Would Like to Remind Customers That Phones Cost Money

John Legere, chief executive officer and president of T-Mobile USA, at an event on March 26 in New York

Everyone loves to hate the phone carriers, so it made sense when T-Mobile (TMUS) declared itself the “uncarrier.” Down with contracts! said T-Mobile. Goodbye to restrictive trade-in policies! This pitch made so much sense, apparently, that AT&T (T) has decided to head down the same road. In the last few days, AT&T bought Leap Wireless, a company focused on low-budget prepaid phone customers, and announced a more flexible policy for people looking to upgrade their smartphones.

In part, each company is trying to distance itself from the popular perception that wireless companies force people into arbitrary, restrictive contracts and then squeeze them dry. This is definitely why T-Mobile’s pink-T-shirt-wearing chief executive, John Legere, is prone to mildly obscene rants about the phone industry, as though he is the eccentric leader of some consumer-rights group. But each company would also like to stop subsidizing customers’ expensive smartphones, or at least make those subsidies less generous, and this is a first step.

“The whole underlying challenge is to make the actual retail price of the phone more transparent to the customer,” says Charles Golvin, an analyst with Forrester Research (FORR).

This doesn’t mean that either company’s new trade-in program is a model of clarity. If anything, they are more confusing than the current model, in which you get a discounted phone in exchange for a two-year commitment to pay for a wireless plan. With AT&T, there is no upfront payment. Instead, the customer pays for the phone in installments, based on the cost of the phone. After a year, she can trade it in for a new model, even though she hasn’t completely paid for the first one. With T-Mobile, customers pay a $10 monthly charge for the right to trade in their phones for new models after six months, so people have to spend $60 before being eligible. After that time has passed, they can hand over their used phones for new ones. There are arguments for the benefits of each plan. In any case they really only matter to people who want a new phone more than once every two years.

Phone companies are very concerned about holding on to their customers. At this point, pretty much everyone who wants a mobile phone has one already; there are fewer and fewer new wireless customers to attract. The new deals let phone companies offer a benefit to customers who may be thinking about switching, in the form of a discount on their next phone, rather than fining them for wanting to leave early. People like getting phones more than they like getting fined.

The trade-in programs serve another purpose: They create a source of gently used smartphones that can be sold to customers on the lower end of the spectrum. Low-cost prepaid customers seem to be of increasing interest to the phone carriers. Competing in this market was a major reason why AT&T bought Leap (LEAP) last week, and also explains why T-Mobile acquired MetroPCS earlier this year.

“We’re going to create a market, refurb those devices, and resell them,” said Mike Sievert, T-Mobile’s chief marketing officer, when the company announced its trade-in plan last week. Those certified, pre-owned phones have to come from somewhere.